With Few Believers, Technicians Say Market Could Rally On

While many investors fear the market is ignoring reality, some technical analysts say stocks could continue to move higher as the market looks past what worries it.

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The unresolved European debt saga, the so-called U.S. “fiscal cliff” and the tension surrounding the U.S. presidential election are all wild cards for the market.

Slowing corporate earnings and the sluggish U.S. economy and global growth, in general, are all valid worries. Yet stock prices are riding a wave of momentum to near four-year highs, even as few investors can be found that love the stock market.

“I think we’re in good shape to go higher, sort of riding the run if you will,” said Carter Worth, chief market technician at Oppenheimer Asset Management. The S&P 500 closed above 1,400 Tuesdayfor the first time since early May, and it was hovering in that area Wednesday afternoon.

“It has to do with the world looking out. The market right now is contending with the last week in January and first week in February. Obviously, whatever the fiscal cliff people are talking about, we will be past it. Whatever election people are talking about, we will be past it,” he said. “The number one leading indicator is stock prices … so here it is, the message of the market is things are not as bad as the headlines would appear.” (Read More: Cramer—Biggest Myth About Markets)

More fundamentally oriented market strategists have been worrying about slowing earningsand fretting about the potential of a congressional battle royale over the fiscal cliff, the dual expiration of tax cuts at year end and automatic spending cuts Jan. 1 if Congress fails to act. Some say it has already slowed business activity and will hit the stock market much like last summer’s deeply partisan congressional feud over the U.S. debt ceiling.

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“Not so much is happening today, but yesterday was a very big deal. The SOX (semiconductor index) confirmed a bottom. You also had, equally important, the small caps also confirmed a bottom yesterday,” he said Wednesday. “The SOX and small caps are economically sensitive so the fact they confirmed a base is suggestive that the bearish apocalyptic trade is being priced out of the market, and we are evolving toward a more stable, optimistic, more bullish environment for equities.”

Kotick has expected stocks to correct during the summer and see a move up in the fall. “Since 1900, if you look at the election season (starting) from August to September, the market tends to really trade positively. From August to the end of the year, we call it pre- and post-election optimism. You have a very strong tailwind,” he said.

“The market always wants to find the pain trade,” he said. “Most people are either neutral bearish or really bearish. The most painful trade would be a higher stock market because nobody has it,” he said.

Not all technicians are convinced equities will continue to ride the current wave higher. Technical analyst Louise Yamada said while the stock market feels like it will head higher, there are some warning signs. One is that the Dow average and Dow Transports are not moving in tandem, as the Dow theorists believe they need to be to confirm a bullish move. The Dow on Wednesday afternoon was up more than 1percent for the month so far, while the Transports were about a third of a percent lower. (Read More: Dow Rally Likely to Hit Barrier at 13,500)

Her proprietary volume indicator is also sending a troubling sign. “The up/down relationship has not been impressive. It’s been right on the line of trying to get out of oversold and going back to oversold,” said Yamada, managing director at Louise Yamada Technical Research Advisers.

“There’s not the oompf yet that you like to see if something’s going to move substantially higher,” she said. If the volume indicator does not move into the zone where it shows positive buying volume, “that leaves some question marks as to what’s happening below the surface.”

Kotick said he does not expect to see a straight move higher. “The next couple of weeks, end of summer, slow volume whippy trading, meandering tone, but we are setting up for gathering strength before and after the election,” he said.

Yamada said the market’s technical cross signals are a bit puzzling. “It seems to be selective stocks that are getting an inordinate amount of attention. At least we’re seeing a little bit of possible broadening,” she said.

Oppenheimer's Worth said the market is being powered by relatively few names, and some of the recent high-profile blowups, like Pricelineand Coach have little impact on the averages. “The top 40 names in the S&P 500 mathematically would represent 46 percent of the S&P,” he said.

“The only way you see trouble is if you start seeing trouble in those,” he said.

Worth expects the S&P to finish the year at 1,450. “When we get to 1,422, you back and fill,” he said. That would then take the index to 1,400, 1,390, before positioning it for a new high of 1,435 and 1,450.